Sometimes it takes extreme events in order to regain a lost perspective on the market, especially after an eight-year, 220% bull market. After nearly a decade of climbing equities prices, one’s sense for proper valuations tends to get a bit skewed. Volkswagen’s ongoing collapse is certainly one of those extreme events, bringing the stock’s American depositary shares down to 2007 levels. Volkswagen’s price-to-earnings (P/E) ratio is now an anemic 4.8, and its dividend yield has shot up to 4.7%.

At €202.5 billion in sales last year, the company is now valued the same as when its sales were half as much. The snapshot look sure seems one of undervaluation.

That snapshot looks even clearer when considering a company like Tesla Motors Inc. (NASDAQ: TSLA). Tesla’s total revenues were $3.2 billion last year, just over 1% of Volkswagen’s. And yet, the two companies are valued very similarly, Volkswagen at $55 billion and Tesla at $32 billion. Something is off here. The question is what’s more off the mark, Tesla’s valuation or VW’s? The answer is of course both, but to what degree on both sides is the real issue.

The fact that Tesla trades at a huge premium is no secret to anyone. The name Elon Musk carries a mystique with it and people think of space tourism, giant “hyperloops” vacuuming people across California in fractions of a second, and even terraforming Mars. The allure of zero emission electric cars has been hammered into the current generation of young Wall Street traders since they were kids, and Musk has been the first to at least partially succeed in the endeavor, earning him a flood of capital at enormous premiums on top of $1.7 billion losses and $2 billion in debt so far. In terms of just the raw numbers, it is doubtful we can even call this a partial success, given that Tesla’s losses keep mounting.

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The question isn’t whether Tesla can make good cars. That it has proven hand over fist. The question is whether it can make good cars profitably. So far it can’t, and if that continues, all the capital poured into Tesla will have proved to be misallocated and ultimately consumed.
So yes, Tesla is overvalued in a fundamental sense, but as long as money is not scarce — read, interest rates are near absolute zero — more and more capital flying on high hopes for the father of the hyperloop, space-exploring Martian terraformer will keep flowing in on every success, no matter how small.

And how undervalued is Volkswagen? That question can be answered in two ways. As long as the debt pyramid that sustains the passenger car industry stays intact, Volkswagen is substantially undervalued. If we use the rough rubric of BP PLC (NYSE: BP) as our guide, the Gulf oil spill of 2010 took BP shares down 55% before a bottom held. BP’s P/E ratio was taken down from 11.33 to 5.1 in two months. A rough target for VW on that score would be the $17 to $20 range, and it has only been plunging for two weeks. That’s six more to go, give or take.

Just as people eventually forgot the BP fiasco, which caused much more destructive pollution than VW by far, they will forget the diesel scandal as well. And just as BP’s stock bottomed long before the hysteria against the company cleared away, so will VW’s.

But, if the debt pyramid supporting global auto sales were to lose its main support, which is near zero interest rates, it’s a whole different story. If that happens, VW shares may never regain their pre-scandal levels.

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In the end, it’s this perpetual zero interest rate environment that has enabled the Tesla buying craze and for stocks like VW to bounce around in a trading range five times higher than where it was between 2000 and 2005. A new car company with 1% of the sales of a bedrock could never achieve a valuation rivaling the bedrock under any other circumstances. But Tesla will keep hovering in its current range as long as the cheap money keeps flowing and there is exciting news to focus on. (Maybe Musk will drive one of his new unprofitable Model X SUVs to Mars on a terraforming mission.)

And the storm of venom around VW will soon dissipate, just as it did for BP. If you believe the debt pyramid has a long way to build before falling, look for a bottom in VW between $17 and $20 in the coming weeks.

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